1 Do private property rights include the right to destroy the owned good?

- yes
(from Lena’s google doc: Property rights are theoretical socially-enforced constructs in economics
for determining how a resource or economic good is used and owned. Resources can be owned
by (and hence be the property of) individuals, associations or governments. Property rights can
be viewed as an attribute of an economic good. This attribute has four broad components and is
often referred to as a bundle of rights:
- the right to use the good
- the right to earn income from the good
- the right to transfer the good to others
- the right to enforce property rights
Private property is both excludable and rival. Private property access, use, exclusion and
management are controlled by the private owner or a group of legal owners.
A definition of property, which includes its most extreme incidence of ownership, has been
virtually unchanged since the mid-19th century. As far back as Roman law, the prevailing attitude
has been to give an owner the right to use, or to misuse, his private property, without the state’s
interference. So in my opinion a right to destroy the owned good is a part of - the right to use the
good.)

Is it possible that at least one person can be made better off by changing a
Pareto-efficient allocation?
also yes
(from Lena’s google doc: Pareto efficiency, or Pareto optimality, is an economic state where
resources cannot be reallocated to make one individual better off without making at least one
individual worse off. Pareto efficiency implies that resources are allocated in the most efficient
manner, but does not imply equality or fairness. An allocation is Pareto efficient if there is no
other allocation in which some other individual is better off and no individual is worse off.
So the answer is yes, but then the other person will worse off.

Pareto improvement: a re-allocation of goods that makes at least one actor better
off, but no one worse off
Pareto efficiency: an allocation where no one can be made better off without making
at least someone else worse off(i.e. no Pareto improvement is possible)

How would you argue that every institution is a contract?

There are formal and informal institutions and formal and informal contracts
(North) “Institutions are the humanly devised constraints that shape human
interaction.” Both formal and informal contracts, and formal and informal
institutions exist. (...will write more on this)

(from Lena’s google doc: Institutions help to organize, coordinate or cooperate in order to gain
benefits / reduce negative implications from interdependency and imperfection, they are “rules of
the game”, as a result they can be regarded as contracta. )

What problems would you expect if social costs from an activity are different
from its private costs?

One might expect that externalities would arise. These externalities could come at
the detriment or benefit of those experiencing the externalities.
From Lena’s google doc:

● Costs of paying for petrol (personal cost)

● Costs of increased congestion (external cost)
● Pollution and worse air quality (external cost)
● The social cost includes all the above.

Example of social cost – smoking

If you smoke, the private cost is £6 for a packet of 20 cigarettes. But, there are also external costs
to society

● Air pollution and risks of passive smoking

● Litter from discarded cigarette butts
● health costs

The social costs of smoking include the total of all private and external costs.

Rational choice theory suggests individuals will only consider their private costs.Therefore, if
social costs significantly vary from private costs then we may get a socially inefficient outcome in
a free market.

2 Is the willingness-to-accept of a neoclassical firm equal to the costs, or

the marginal costs?

***Willingness to accept a sales contract***

(From slide 9:) “Supply price equals marginal cost: p=C’(q)” “What matters here is
not the cost level, but the marginal cost”

(From Lena’s google doc: The firm has a single goal, that of profit maximization.This goal is
attained by application of the marginalist principle MC = MR ;Marginal cost=Marginal Revenue.
Revenue is simply the amount of money a firm receives. If a firm is selling one product at a
homogenous price (each unit sold is the same price) then total revenue will equal price times
quantity.)

3
If natural resource use and machinery are input factors in production – what
are the consequences for resource saving policies if they are substitutes or if
they are complements?
substitutes- more machinery use & less resources
complements- you will produce less because you need both to make product.
perfect complements( ex. shoes- top and bottom both needed)

(From Lena’s google doc: Let’s say natural resource - n, machinery - m .

Substitute Resource saving policy - allows you to replace one resource with another resource. So
it reflects the give-and-take between factors, such as capital and labor in our case resource - n,
machinery - m , that allow a firm to maintain a constant output, in our case use instead of primary
natural resources as input alternatives(machinery) sometimes even with higher efficiency.
If they complete each other the output will always say the same)

Perfect substitute:
is a product or service that can be used in exactly the same way as the good or
service it replaces. This is where the utility of the product or service is pretty much
identical.
Perfect complement:
is a product or service that has to be consumed with another good. If consumption
of one good rises, If a higher quantity is demanded of one product, a higher quantity
will also be demanded of the other.
Resource-saving policy substitutes:
Natural resources can be saved through more use of machinery. One input factor
can substitute the other with the output remaining unchanged.
Resource-saving policy complements:
Natural resources cannot be replaced by more use of machinery. Use of less
resources,will result in reduced use of machinery (since they are complements) and
lower output.
These are the two extreme cases. There are many more were natural-resources can
be partly replaced through the use of more machinery but not completely.

The neoclassical theory of production does not consider institutions. If

institutions were considered, which components of the neoclassical theory
would not be affected? Develop an argument to justify your statement.
Neoclassical key assumptions-
- homogenous goods and technology - institutions are exogenous: perfect spot
markets, no access limitations, no monopoly, compliance, no externalities,
instantaneous - profit maximizing firms subject to constrained costs; production is a
black box (i.e. administrative coordination is disregarded); fully available
production factors - individuals are rational actors /homo oeconomicus (they act
utility maximizing subject to a budget constraint; with stable preferences and the
objective of Pareto efficiency; outcomes are ranked and the highest is chosen,
disregarding emotions) - there are no transaction costs ( perfect information,
complete property rights, full transparency) - equilibrium principle: prices adjust
until demand equals supply (PPT; Eggertson, 2003; Furubotn and Richter, 2000;
PPT)
(Form Lena’s google doc: The basic idea in neoclassical production theory is that incomes are
earned in the production of goods and services and that the value of the productive factor reflects
its contribution to the total product. (Small review about the theory Neoclassical theory) 3 basic
assumptions:

1.People have rational preferences between outcomes that can be identified and associated with
values.

2.Individuals maximize utility and firms maximize profits.

This goal is attained by application of the marginalist principle MC = MR. If there are institutions
they can effect partly, they can give subsidies, grants, tax discount so they effect the way to goal ,
and not the goal (assumption ) itself.Demsetz

3.People act independently on the basis of full and relevant information.

Neoclassical economics emphasizes equilibria, which are the solutions of agent maximization
problems. Regularities in economies are explained by methodological individualism, the position
that economic phenomena can be explained by aggregating over the behavior of agents. The
emphasis is on microeconomics. Institutions, which might be considered as prior to and
conditioning individual behavior, are de-emphasized, that is why they don’t really influence any of
the components of the theory

Suppose a firm with two production factors produces at minimal costs, If

ceteris paribus, the price of one production factor rises: what happens to the
quantity output?
ceteris paribus- everything else (besides production factors) stays the same
→ quantity would lower

4.
Think of examples for substitutes and complements in terms of coffee, tea and
milk.
coffee + tea are substitutes
tea + milk are complEments
coffee + milk are complEments
cow milk and almond milk are substitutes

Calculate the MRS for a Cobb-Douglas utility function

MRS- Marginal Rate of Substitution--- slope of indifference curve
Cobb-Douglas: U(x)= Ax^a*y^b
Use diagrams to infer possible effects of a rising price

5 Develop an argument why not every Pareto efficient allocation is

socially optimal
efficiency does not mean social optimization

Note 1: Social optimality implies Pareto efficiency, not the other way round
(there is usually one social optimum but many efficient allocations)

Why are Pareto improvements possible if the marginal utility obtained from a
good differs between two actors (and both marginal utilities differ from the
price)? Why is this not generally true, if the level of utility differs between
both?

General equilibrium: All relative prices are equal to the ratio of the respective
marginal utility.
MRS for any pair of goods equal for all consumers: If one would obtain less marginal
utility from one good, and someone else less marginal utility from another good,
they could trade for mutual benefit.

Is it true that (in general equilibrium) all costs of producing goods equal their
prices?
No, the Zero-profit condition says: all producers’ revenues exactly cover costs. So all
costs of producing goods equal their revenues which is price times quantity. The
marginal costs are equal to the price.

Is it true that (in general equilibrium) for any pair of goods, the ratio of the
respective marginal utility is equal to the ratio marginal costs?
 Yes---
-All relative prices are equal to the (inverse) ratio marginal costs
•All relative prices are equal to the ratio of the respective marginal utility

What properties are required for a perfect market? Can you extend the list
from the previous slide?

1. Private property rights in consumed and produced goods

2. Perfect competition: no party can exploit market power
3. No further interdependence between producers and consumers (no
externalities)
4. Full information: utility and costs of goods known to all parties
5. Transactions without costs
6. Rational actors

Find a real-world situation that might be well analyzed with game theory

Construct two bi-matrix games, one with a Pareto-efficient Nash equilibrium,

the other with a Nash equilibrium that is not Pareto-efficient.
Find all possible Nash equilibria of game (D), depending on the wage level w.

· For w>=15: NE= (share, work) = (15,10)

· For 15>w>8: no NE

· For w<=8: NE= (pay, shirk) = (16-w, w)

7 Which of the following statements are true?

According to Crawford & Ostrom, shared strategies require a deontic.
FALSE -shared strategy:AIC

An ADICO statement contains consequences for not following the aim.

TRUE: O=Or else- institutionally assigned consequences for not following the aim

Characterize private property with the grammar of institutions

Property rights are transferable, exclusive and complete use right with liability.

Private property is an institution to lower opportunity costs and thereby total costs.

Characterize the following types of TAC whether they occur ex-ante or ex-post
or both:
bargaining- ex- ante
decision-making- ex ante
enforcement ex post
monitoring ex post
sanctioning ex post
search ex ante

8
Which of the following statements is true?
Public goods can be traded in markets FALSE
Open access goods are characterized by rivalry and non-exclusion TRUE

Suppose there is an external effect between two independent firms. Can it be

internalized if the two firms collude (i.e. they become one firm)?
Depends on the externalities. Possibly.

10 Analyze a lease contract of personal property for a car. What kind of

property rights are transferred to the lessee? What property rights remain
with the lessor? What kinds of opportunism do play a role?
Type of property rights- lessee- property right only for a fixed amount of time
agreed upon in a contract, right to exclude,
lessor- private property rights, right to change fee depending on circumstances
Incentives- gains from trade, solving problems from risk aversion
Problems/ Opportunism-
Pre-contractual: asymmetric information -> opportunism of lessor Post-
contractual: asymmetric information -> opportunism of leaseholder Post-
contractual: specific investments -> opportunism of lessor

•What are the basic assumptions of principal-agent models?

There is a landowner (the principal) who delegates the use of land to a peasant (the
agent)
•Both want to achieve optimal benefits
•The landowner cannot observe the effort undertaken by the peasant (but the
output)
•If the principal gets the harvest, and pays the agent for her effort, she may shirk

In general:
a. Information asymmetry to the (potential) advantage of one actor
 b. Interest of principal and agent are not congruent (different payoffs,
in some settings different risk aversion)
c. Principal and agent enter into an incomplete contract
d. Opportunistic behaviour
e. Reducing information asymmetry requires transaction costs, so
that P-A problems might be accepted to some degree

•Are there problems with the ex-post P-A-model if actors are risk-neutral?
Risk neutral is a mindset where an investor is indifferent to risk when making an
investment decision. The risk-neutral investor places himself in the middle of the
risk spectrum, represented by risk-seeking investors at one end and risk-averse
investors at the other.
It has been argued that “utility” levels are simply defined as the quantities for
which a rational person would seek to maximize its expected value. This makes
risk neutrality tautological rather than empirical, and in any event cannot work if
people care about the entire distribution of utility levels.

•Can post-contractual information asymmetry lead to moral hazard or to

adverse selection? Yes, to moral hazard.

*Maybe it would be more of adverse selection. Because as there is assymetric

information for renting the car, this has a risk of being in bad conditions (lessors
fault) or the lesee can use it in a bad way, which may lead to no transaction.

Note to that note: I think it can only lead to moral hazard, if you take sharp
definitions of the terms. yes post-contractual information asymmetry can lead to no
transaction, when it is anticipated, so it can make an issue also before the contract is
made. still it is then no transaction due to anticipated post-contractual information
and anticipated moral hazard and not due to adverse selection and information
asymmetry that regard the making of the contract (e.g. false product information)..
moral hazard is about what happens after the contract, adverse selection about
what happens until the contract is made. but per definition adverse selection is done
at the moment in time when we talk about post-contractual information asymmetry.

•Select one remedy to ex-ante contractual hazard and look for a real-world
example
Additional contractual components- buy-back guarantee
insures that if the product is not good then seller will buy back, incentives for
producer to have a good product but if faulty buyer has insurance on their purchase.

11 Why are there firms? Coase(1937) The nature of the firm

Under which conditions should goods be transacted on the market instead of

producing them in-house (make-or-buy decision)?
 if it is cheaper to import them
How can vertical integration of firms be explained?
vertical integration is when a company owns/controls multiple levels of the
supply chain. usually a firm will only control one stage.
What is a good governance structure of an organization?

1.Under which circumstances would it make sense for a firm to hire

temporary workers?
The use of temporary workers enhances labor flexibility for firms. Compared with
permanent (indefinite-term) employment arrangements, temporary (fixed term)
employment arrangements allow firms to use labor for a shorter period without
being responsible for workers’ benefits or the costs associated with hiring or firing.
Firms draw temporary labor from various channels—for instance, by hiring
independent contractors and on call workers and using workers from temporary
help services (THS) agencies.

- Human capital specificity is low.

2. Assuming that Volkswagen is not yet present in the Ukraine but wants to
expand to this market. Which form for sales would you recommend?
exporting

3. Under which circumstances would it make sense for IKEA to produce

sausages for hot dogs or Billy shelves themselves?
if it was cheaper for IKEA to make them instead of buying them cheaply from
outsourced companies

4. What could be the reasons for RWE (and formerly Vattenfall) to extract
brown coal themself in Germany?

5. Under which circumstances does it make sense for a company to open up

its own kindergarten?
if the company would profit

What are, according to Williamson’s TCE, the three fundamental features of a

transaction?
Asset specificity: investments might lose value if contract cancelled
•Uncertainty: unexpected disturbances might lead to maladapted contract
•Frequency: frequently repeated transaction can discipline opportunism
and can reduce the average internal transaction costs

How shall a transaction with high asset specificity and high frequency be
governed?
 Hierarchy/ Integration
Under which conditions shall assets that generate large quasi-rents be
governed by long-term contracts?

large quasi-rents = high asset specificity

thus, if uncertainty is low, long-term contracts should be chosen

12 Is it true that, according to Demsetz, the introduction of commercial fur

trade on the Labrador Peninsula led to common property of hunting territory?

◦ No, the introduction of commercial fur trade on the Labrador Peninsula led
to a seasonal private ownership allotment system (maybe in an ostrom
interpretation, it would be common property (?).
What are the 7 components of the IAD, and what are the 7 working parts of an
AS?

1. Participants: Actors that are capable of making a choice (andassigned to a

position)Important attributes can be: number of participants; status as
individual or collective actor; attributes like demographic data, experience,
size.
2. Positions: Roles that participants can play in an action situation (“hat they
can wear”) and that are linked to the potential actions that participants can
make
 3. Actions: Participants assigned to a position choose actions from a choice set
4. Control: Extent to which participants have control over the action situation,
e.g. to affect decisions of others
5. Information: The information that (different) participants have of specific
attributes of the action situation
6. Potential outcomes: Possible consequences depending on actions (and other
factors)Can be the consequence of self-conscious decisions or unintended.
7. Costs and benefits: How participants value potential outcomes (possibly in
different ways)Can be expressed in monetary term, but also in other metrics.

IAD: Institutional Analysis and Development Framework

Action Situation (AS)

•Use the IAD to describe another AS where, in particular, position rules matter.

13
Think of a closed island economy where inhabitants produce red color
pigments by jointly collecting and processing specific lice from cactuses. Now
suppose that contact to other countries becomes established that strongly
demand colorants.
What changes in transaction costs can be expected?
What changes in opportunity costs can be expected?
If the property rights structure changes, what direction of change can
be anticipated?
Lenas:
A change will happen in legal fees, communication charges, the information cost of
finding the price, or the labor required to bring a good or service to market, including
commission, stamp duty and other fees or taxes.
If the trading terms are to be more complicated than a straightforward cash deal-
such as payment in installments, warranties/guarantees, service/maintenance
provisions, or options for future purchases at a fixed price- negotiating such a
detailed contract is costly in terms of travel expenses, paying experts, etc.

After the trading parties have agreed terms, there could be additional costs involved
in policing or monitoring the other party to make sure that he or she is adhering to
the terms of the agreement.These are some of the main transaction costs – policing
and enforcement costs, bargaining and decision costs, and search and information
costs.

I think that opportunity costs are not that high, because there is a strong demand for
the product

Tragedy of common goods can happen, in order to prevent resource destruction

government or private ownership should be imposed.

Maybe collective choice institutional change will appear.

Hi Lena! Isn’t this a Demsetz-case basically? Value of resource goes up (due to

competition, external trade) → this may justify the development of more complete
property rights → possible types of ownership that may account for this change:
communal, private or state

14

15

Is it true that the median voter theorem holds under majority rule?
yes by definition of the theoreme
Short Answer: Yes, by definition of the theorem: Under majority rule, the voting
system selects the outcome most preferred by the median voter
Median Voter Theorem tries to explain the outcome of majority voting
The median voter is the actor whose optimal outcome lies closest the optimal
outcome of just half the voters
Assumptions
• Political options can be arranged on a spatial continuum
• Individual voters always prefer the point on this continuum that is closer to where
individual utility is optimized
• Only the political decision on one issue is taken into account
Extension:
Under non majority voting not true! e.g. 2/3 quorum: focal voter is the veto player

Suppose you are organizing a club to represent your joint interests (e.g. a
Fachschaft/ student union). What kind of voting rule for club decisions would
you recommend?How would your recommendation change, if new
information technologies further reduce transaction costs?

To take into account:

1. Opportunity cost (expected external costs)
If individual actor expects c.p. ⬆ opportunity cost, she will want ⬆ required number
of votes to protect against undesired decisions from the collective
2. Costs of agreement
If individual actor expects ⬆ costs of agreement, she will prefer ⬇ required number
of votes to reduce costs
3. homogeneity vs. heterogeneity of actors (voters/members)
=similar vs. different cost curves
=same vs. different preferred voting rules
Homogeneity of actors simplify constitutional choice (finding a preferred voting
rule)
I assume homogeneity also leads to ⬇ costs of agreement, due to similarity in
opinions
Assumptions: (the question is very broad, so they are needed)
1. degree of opportunity cost not known, but likely ⬇ —>number of required votes ⬇
2. Cost of agreement likely ⬇ due to common interest —> number of required votes
⬆
3. Club = ⬆ joint interest = ⬆ degree of member/voter homogeneity
4. Expected Number of members ⬇ , Cost of agreement ⬇ —> number of required
votes ⬆
Recommendations for voting rule:
Expected cost of agreement ⬇ , Expected Number of members also ⬇ ,
expected homogeneity ⬆ therefore ⬆ number of required votes recommended <50%

In this case the Opportunity cost will also be minimised, no matter if they are ⬇ or ⬆ .
Extra:
This would be my personal recommendation, but the decision about which voting
rules to use should be made by all founding members of the club in the beginning by
⬆ number of required votes or even consensus. This would require a one-off ⬆ cost
of agreement, but establish the voting rules based on a ⬆ number of members.
Reduced Transaction cost:
—>cost of agreement goes down
—>Shift right toward higher necessary agreement percentage (towards unanimity
vote) for constant TAC
—>reduced opportunity cost
—>M shifts right

efficiency always related to marginal rates

marginal rate of substitution = price = rate of technical substitution RTS
(consumer side) (producer side)

16

Is it true that competitive rent-seeking leads to Pareto-improvements?

Never

Consider a probabilistic Tullock contest with two players. Suppose that the
value of the auctioned policy increases c.p. for one actor. How does the total
effort change?
Also rises.